Airlines, awaiting allies, enter 2013 on a wing and a prayer

New Delhi: Turbulent skies will continue to be a reality for Indian aviation in the new year, much like in 2012. Despite some policy initiatives and lessening competition, Indian airlines will continue to struggle-because of their inherent inefficiencies, due to policy overhang and a difficult operating environment.

Centre for Asia Pacific Aviation, in its Outlook 2012-13 released in May, estimated that India's airlines would post a combined loss of $1.3-1.4 billion and that this loss would be largely on account of two airlines-Air India and Kingfisher Airlines.

The highlight of 2012 has to be the demise of Kingfisher Airlines-which fell from the skies because of unmanageable debt, inability of the management to pay employees, keep aircraft in working order and in the end, even to adhere to a published schedule.

As 2012 ends, there is a possibility of at least one large Indian carrier getting a well-endowed foreign airline to make minority equity investment. Reuters

As the year draws to a close, this airline is talking of limited revival. But any revival will come with several question marks over the promoters' ability to infuse cash, pay off vendors and get the confidence of the travelling public back.

Not just Kingfisher, the entire aviation market is beset with some inherent inefficiencies such as inability of legacy carriers like Jet Airways to completely adopt the low cost carrier (LCC) model of a successful peer like IndiGo, lack of price elasticity and high costs of operation.

Then, a flawed legacy of allowing foreign carriers such as Emirates and others to take away bulk Indian traffic at the cost of Indian carriers is only making matters worse. This anomaly is gradually being corrected but a lot of damage may not come undone for a long time.

As 2012 ends, there is a possibility of at least one large Indian carrier getting a well-endowed foreign airline to make minority equity investment. Also, there is the added prospect of a grounded Kingfisher taking to the skies again. Besides, there is some hope of bringing transparency to aviation turbine fuel (ATF) pricing issue as well but any tax rationalisation on this key aviation industry cost head is still a long way off.

But the overall aviation story remains gloomy. Balance sheets of all listed airlines as well as Air India are sagging under the weight of their enormous debt, high costs of aviation turbine fuel (ATF) continue to drag bottomlines further south and decreasing price elasticity is just adding to the sector's woes.

With yields under pressure, airlines are expected to again unleash low fares-the sector's bane-in the new year and this would further compound their myriad problems.

A story in the Economic Times this morning speaks of airlines offering more 30-60 day advance purchase schemes, causing 10-20 percent reduction in advance ticket prices in the new year. It says fares will soften between January and March as some capacity is added by IndiGo, Air India and Jet Airways. Airlines will offer more seats at the lower end of the fare bucket.

The year began on a bright enough note with a new Civil Aviation Minister Ajit Singh in charge. Within days of assuming office, Singh unleashed a slew of policy initiatives to boost the sector. His first notable success came when he succeeded in first setting the Government's own house in order and cracked the whip on errant pilots of wide body aircraft at Air India.

Though schedules of the airline remained disrupted for over a month, the minister ensured that the strike period was utilised to rationalise AI's international operations. This meant flights which had been historically loss making were axed, frequencies on some routes were altered and overall, the international operations made much more efficient. The arrival of the new, fuel efficient Boeing 787 Dreamliners only helped AI further and the airline has since begun international operations on these aircraft on lucrative routes.

With Singh's strict monitoring and efforts put in by the airline's top management, AI has begun to show a turnaround.

According to a story in Business Standard this morning, AI now accounts for 20 percent of the domestic air traffic, has lowered operating losses by Rs 550 crore in the six months ending September 2012 and its revenue has increased by 4.5% between April and September despite capacity reduction.

Singh took several other policy initiatives but none as bold as getting this Government to allow foreign airlines to invest up to 49% in the equity of Indian airlines. This long awaited step could well become the single biggest factor in the turnaround of Indian aviation in the years to come.

The minister has also ensured a transparent pricing mechanism for ATF which could mean a reduction of up to 15 percent in ATF prices soon. His ministry has also allowed airlines to directly import fuel-and LCC SpiceJet has already availed of this facility-and this could bring down operating costs further for many airlines.

But the private carriers continue to bleed. The most significant market share decline was seen in Jet Airways, which went from being the single largest airline at the beginning of the year to settling at the third place, behind IndiGo and AI, by the close of 2012. The yo-yo between Jet's full service offering, Jet Konnect and JetLite was one reason why the airline perhaps lost market share to IndiGo which continued to gain passengers by staying true to its LCC credo with impeccable on-time performance.

By the second quarter of FY13 though, Jet had taken some corrective measures which included axing flights on unprofitable domestic and international routes, reducing the number of high-cost expat pilots and putting in place several other measures to raise ancillary revenues.

But all these steps won't add up to Jet regaining its lost glory unless the airline manages to clinch a much-awaited deal with Abu Dhabi based Etihad Airways for offloading a minority equity stake.

The deal, if it happens, will mean Jet gets access to the lucrative Gulf market and also to much cheaper ATF. Both these factors will go a long way in ensuring the airline does not have to shrink further to survive. But last reports suggest the deal yet to be clinched and Jet's arch rival Kingfisher is also circling Etihad like a hawk for getting much needed funds for itself.

So the first quarter of 2013 is likely to clarify the picture on which the airline finally clinches the Etihad deal and this could have a significant impact on Indian domestic aviation market.

Not just Jet and Kingfisher, even LCC SpiceJet is seen as a lucrative investment for any foreign carrier looking to make further inroads into India. This airline already has advantages like connectivity to smaller towns and cities across the country through its Q400 fleet and improved financials-it reported a profit after five successive loss-quarters in the June quarter of 2012 and has narrowed losses compared to the year ago period in the September quarter.

SpiceJet has been talking to some private equity players and foreign carriers for an equity deal. Perhaps SpiceJet may also get much needed funds in the new year.

As to Kingfisher, the airline committed a series of blunders on its way to a shutdown in October. To begin with, Chairman Vijay Mallya's decision to buy Deccan Aviation was in itself flawed. Then, Mallya's FCC model for the combined airline despite lack of a big enough addressable market over a sustained period spelt further doom.

An editorial in the Financial Express newspaper this morning notes that KFA's expenses incurred in running a full-service airline-and servicing the huge debt on its books-simply got out of hand at a time when the rising price of crude oil and high taxes on aviation fuel hit the airlines badly.

Prices of ATF have more than doubled since March 2009 to around Rs 70,000/kl and are at near 10-year highs. But despite this, Indigo reported an operating loss of just Rs 87 crore last year on revenues of Rs 5,552 crore while SpiceJet reported losses, post rentals, of Rs 600 crore on revenues of Rs 3,900 crore. KFA's losses, on revenues of Rs 5,493 crore, were much larger at Rs 2,328 crore.

The FE editorial predicts that Jet Airways is expected to report a loss of around Rs 150 crore in 2012-13 not just because costs will double but also because the airline will pay out nearly Rs 1,000 crore as interest; the anticipated revenues of Rs 20,000 crore are not expected to be enough to cover these.

So will 2013 be any better for Indian airlines? A slowing economy has meant less and less passengers are taking to the domestic skies as 2012 ends. The number of passengers flown between January and November this year has fallen to 53.4 million from 55 million in 2011 with the drop having been steeper in recent months. This has prompted airlines to cut capacity, which means the number of seats on offer and avoid high fares even during the peak travel season.

It has also meant yields-revenue pr passenger-have fallen. If Kingfisher actually returns with low fares in an already weak market, this could mean another round of fierce price wars which would certainly leave every Indian airline gasping.

In this high-cost, competitive scenario, IndiGo is believed to be moving ahead of the pack with the inherent advantages of largest passenger share, consistent low fares and a young aircraft fleet which allows faster turnaround of aircraft.

While airlines need to further trim their manpower to aircraft ratio and rationalise routes in 2013, the Government needs to crack the whip on states to reduce taxes on ATF. Fuel accounts for almost half of an airline's operating costs and a factor over which it has no control. The Civil Aviation Ministry has been talking to the Centre and thereby to state governments to reduce sales tax on ATF but till now, its pleas have fallen on deaf ears.

In 2013, if ATF taxation is rationalised and more than one private airline manages to get equity infusion from a foreign carrier, the airlines can have a reasonable chance at survival and perhaps even some profitable growth.